What Is Bad for the United States Is Good for Stocks

An historical examination of presidents, debt, and stock returns.

MINYANVILLE ORIGINAL It is less than three weeks until the elections. One of the biggest political talking points in recent years has been the debt of the United States. This article will examine the effect fiscal responsibility (or lack thereof) has on stock market returns.

Dividends were ignored in this study for the sake of simplicity.

We are interested in the change of debt, not the deficits. The difference is "off balance sheet" items (the most notable of which is Social Security). The debt is $16 trillion. Adding all the annual deficits and surpluses from 1789 onward equates to only $10.7 trillion.

Here is the big picture chart, which runs from December 31, 1789 to September 30, 2012:

War is devastating to surpluses. The effects of the Revolutionary War, the War of 1812, the Civil War, World War I, World War II, the Cold War, the Gulf Wars, and the Afghanistan War can all be easily seen on the chart. The only time the debt/GDP noticeably increased during peacetime was in the 1930s (due to FDR's social programs).

We will take the surplus/GDP of the United States the moment a president left office and subtract from it the surplus/GDP the moment a president entered office. The table below states how much each president added to the surplus/GDP and how stocks performed during his tenure. The numbers for both are annualized.

Some interesting tidbits are as follows:

The only president to preside over a time when there was no debt was Andrew Jackson.

The last president to actually leave with less debt than when he came into office (irrespective of GDP) was Coolidge.

Therefore, all the presidents since Coolidge (and some others before him) that achieved positive annualized surplus/GDP numbers did so by growing the GDP more than the debt.

The last fiscal surplus year was 1957. The so-called "balanced budget" years of 1998-2001 were more due to innovative accounting methods than real fiscal discipline.

The current debt/GDP is 101%.

So what does this mean for stocks? The formula for estimating stock market returns by use of the change in surplus variable is -0.097x + 5.83%. The letter x represents the percentage change in surplus/GDP in one year. This formula suggests that for every 1% decrease in surplus/GDP, stocks go up 0.097%. Therefore, what is bad for the long run future of the United States actually has a mildly positive effect on intermediate term stock performance.

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